Step 2: Your retirement ‘pay cheque’
Understand your options for regular income in retirement
Nothing beats the reassurance of knowing there’s money coming in each month. Then retirement happens and, suddenly, it’s up to you to generate income to live on. The good news is, stability is something you don’t need to give up.
As humans, we’re wired to stick to what we know. It feels familiar and comfortable, but it’s not always the best option for us. Especially when we rely on assumptions that don’t match up with reality. Your super is only one part of your retirement income plan. In reality, most people will be supported by other sources of income such as the Age Pension or income from other investments like shares or property. In this step, we provide a summary of three key sources of retirement income. And we get to the bottom of some of the things people often get wrong about each one.
1. Income from your super: Account-based pensions or allocated pensions
When you retire, one option is to roll your super over into an account-based pension that uses your super to provide you with a regular income in retirement. You get to choose how often you receive your income payments, and how much of your super you withdraw each year (provided it meets the minimum withdrawal requirements). You can also generally make lump sum withdrawals at any time.
Perhaps the biggest misconception about account-based pensions is the level of certainty they provide. As each payment will draw from your super savings, your payments will generally stop as soon as your savings have run out. Something else to bear in mind, is that part of the account-based pension balance is typically linked to the share market as you generally have the opportunity to invest in a range of market linked assets and so your investment – and how long your payments last – could depend on market performance. If markets perform poorly, depending on the proportion of your super which is linked to the market, could mean that your super is at a greater risk of running out.
The impact of the global financial crisis is still on the minds of Australian retirees
Older Australians’ concerns about market performance are not surprising in light of the retirement income losses they experienced at the height of the GFC ten years ago. Superannuation balance falls of around 20% (according to National Seniors Australia) affected the majority of retirees at the time. Now, only 1 in 14 older Australians indicated they would be able to tolerate a loss greater than 20% today, while in total, 59% indicated that they could not tolerate a loss as large as in the GFC.
2. Income from The Age Pension
Once you reach Age Pension age you might be eligible for Age Pension payments, and a series of other benefits. Eligibility for the Age Pension depends on your circumstances and the outcome of Centrelink’s assets and income test. You can find out more about Age Pension rates here.
In Australia, we’re lucky to have the Age Pension to fall back on if our retirement savings run out. It can be common to assume that the Age Pension alone will be enough to live on. The reality is that even the full Age Pension entitlement isn’t enough to cover the cost of living for many retirees.
Association of Superannuation Funds of Australia (ASFA) Retirement Standard figures
||Comfortable lifestyle budget p.a.
||Modest lifestyle budget p.a.
||Age Pension p.a.
|Couples aged around 65
|Single person aged around 65
3. Lifetime income streams
A lifetime income stream, such as a lifetime annuity, provides you with guaranteed income for your lifetime, in return for a lump sum investment from your super or your savings. The key difference to an account-based pension is that your payments are guaranteed for as long as you live. So even if you live longer than you expect, you’ll have the certainty and peace of mind that your income payments will continue, and can continue for your spouse’s life if you choose as well.
A common assumption people make is that you either have an account-based pension or an annuity. In fact, you don’t have to put all of your super or savings into an annuity. You can use part of your super or retirement savings to buy an annuity, while the rest of your money stays in your super or other investments. An annuity provides an additional layer of protection in retirement because your payments won’t be affected by how investment markets perform. It provides a source of income that creates a stronger safety net for your retirement.
Lifetime annuities come with other features too, which you can read about here.
A lifetime annuity can work alongside your account-based pension
||Payments generally continue until your investment runs out
||Payments are guaranteed under the policy and payable for life
||Payments are impacted by share market movements or interest rate fluctuations
||Payments are not impacted by share market movements or interest rate fluctuations
|Easy access to your capital/ability to make partial withdrawals
||While lifetime annuities are designed to be held for life, there is usually a long period where you can access a lump sum if your circumstances change. Partial withdrawals are not generally available.
||No – your payments may increase in line with inflation, but generally your capital isn’t protected as you are simply just withdrawing more from your balance
|Option to index payments to inflation
Other investments to support you in retirement
There are some other investment options that can supplement your income in retirement, such as term deposits, property and shares. All these options come with their own pros and cons, and you can read more about them here.
What we get asked
Q. How will a lifetime annuity affect my Age Pension?
A. Purchasing an annuity could immediately increase your Age Pension payments, due to changes to Centrelink’s means testing rules. Unlike many investments which are 100% assessable for the assets test, certain lifetime annuities are treated more favourably.
Generally, 60% of the annuity purchase price will count as an asset, through to age 84, or for a minimum of five years. From then onwards, only 30% of the purchase price will count.
For the income test, only 60% of your lifetime annuity payments are assessable.
Test your knowledge of step two
One of the best investments you can make for your retirement is taking time to understand your options. Take this mini quiz to review what you’ve learned so far.
Q1. Payments from the majority of account-based pensions will continue after the balance runs out: